On November 15, 2011, the Financial Industry Regulatory Authority (FINRA) announced that it ordered Chase Investment Services Corporation to reimburse customers more than $1.9 million for losses incurred after Chase recommended unsuitable unit investment trusts (UITs) and floating rate loan funds. FINRA also fined Chase $1.7 million. Unsuitable investment recommendations are one of the most common forms of stockbroker negligence and stockbroker misconduct.
FINRA’s investigation found that Chase brokers recommended UITs and floating rate loan funds to unsophisticated customers with little or no investment experience and conservative risk tolerances. FINRA found that the Chase broker did not have reasonable grounds to believe that the investments were suitable for the customers. FINRA also found that Chase failed to implement supervisory procedures to reasonably supervise the sales of UITs and floating rate loan funds.
A UIT is an investment product that consists of a diversified basket of securities, which can include risky, speculative investments such as high-yield or “junk” bonds. Floating-rate loan funds are mutual funds that generally invest in low-credit-quality or “junk” loans.
FINRA’s Executive Vice President and Chief of Enforcement said that “. . . it is incumbent upon firms to properly train and provide guidance to their brokers about the products that they sell and supervise the sales practices of their brokers.” The FINRA executive also stated that, “Chase allowed its brokers to sell risky UITs and floating-rate loan funds without providing them with the training, guidance and supervision necessary to determine whether these products were suitable for their customers, which resulted in losses for Chase’s customers.”
FINRA found that Chase did not adequately train its brokers about the risks and suitability of UITs and floating-rate loan funds. Chase brokers made nearly 260 unsuitable recommendations to purchase these UITs to customers with little or no investment experience and a conservative risk tolerance. The customers suffered losses of approximately $1.4 million as a result of the unsuitable investment recommendations.
The floating-rate loan funds that Chase sold also were very risky. Chase brokers recommended the purchase of floating-rate loan funds to customers who had conservative risk tolerances, were seeking preservation of principal, or were seeking a highly liquid investment. These customers suffered losses of nearly $500,000 as a result of these unsuitable recommendations.
This is one of the relatively rare circumstances where securities regulators have forced a brokerage firm to repay investors for investment losses that they have suffered. More often than not, investors are forced to hire private attorneys to file lawsuits and arbitration claims in an attempt to recover investment losses.